Natchez, Inc. is considering the purchase of a new machine costing $200,000. The

Question

Natchez, Inc. is considering the purchase of a new machine costing $200,000. The company will incur $5,000 per year in cash operating expenses but it will allow the company to earn an additional $100,000 per year in revenues. Natchez expects the machine to provide future benefits for 3 years and salvage value at the end of the 3-year period to be $10,000. The company uses straight-line depreciation method. The income tax rate is 30%. If the required rate of return is 10%, how much is the net present value of this project?

Explanation / Answer

Net Present Value (NPV) = net cash to be received * {(1-(1+required rate of return)^- number of periods/required rate of return} - Initial investment

= 100000 * [{1 - (1.1)^-3}/0.1] - 205000

= 100000 * 2.4868 - 205000

= 248685 - 205000

= 43685 which is approximately 43769

And = $43,769

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